Leasing or buying
A lease is a long rental. You pay for the part of the car’s value you use up while you drive it, plus a charge for the money tied up in the car. At the end you hand it back, or buy it for a price set at the start. Lease payments are often lower than loan payments on the same car, because you are not paying for the whole car.
The words on a lease
- Capitalized cost, or cap cost: the price of the car in the lease. It can be negotiated, just as a purchase price can.
- Cap cost reduction: money you put down, which works as a down payment.
- Residual value: what the leasing company expects the car to be worth at the end. It is set by the leasing company.
- Money factor: the rate for the rent charge, written as a small decimal such as 0.00250. Multiply it by 2,400 to get roughly the APR it works out to. A dealer can sometimes add to it, just like a loan rate.
- Term: how many months the lease runs.
Worked example
How a lease payment is built
- Cap cost
- $30,000
- Residual value
- $18,000
- Term
- 36 months
- Money factor, for example (about 6% APR)
- 0.00250
- Depreciation part: cap cost less residual, divided by the months
- $333.33
- Rent part: cap cost plus residual, times the money factor
- $120.00
- Monthly payment before tax and fees
- $453.33
$30,000 less $18,000 is $12,000, spread over 36 months. The rent part is $48,000 times 0.00250. And 0.00250 times 2,400 is 6%.
Rates, prices and values here are for example only. The lease payment is the depreciation part plus the rent part, each rounded to the cent.
The limits that come with a lease
- Miles. Leases set a yearly limit, often between 10,000 and 15,000 miles. Go over and you pay for every extra mile at turn in. At $0.25 a mile, for example, 3,000 miles over is $750.00.
- Wear. Dents, worn tires and stained seats beyond normal use are charged when you hand the car back.
- Fees. Many leases have a fee at the start and a disposition fee at the end.
- Ending early. Getting out of a lease before the end can cost a lot. Read that part of the contract before you sign.
Federal leasing rules, known as Regulation M, require the leasing company to give you written disclosures before you sign, including the amount due at signing, the monthly payment, the total of payments, the charges for extra miles and wear, and what ending early can cost. The money factor itself does not have to be shown, so ask for it.
Why buying and keeping usually costs less over the years
With a lease you are always making a payment, and at the end you own nothing. With a loan the payments stop, and every year you keep the car after that is a year without a car payment.
Worked example
Six and ten years of driving
Swipe the table sideways to see every column.
| Leasing | Buying and keeping | |
|---|---|---|
| Payments over 6 years | $32,639.76 | $34,798.80 |
| Car you own after 6 years | None | $12,000 |
| Payments less what you own, 6 years | $32,639.76 | $22,798.80 |
| Payments over 10 years | $54,399.60 | $34,798.80 |
| Car you own after 10 years | None | $6,000 |
| Payments less what you own, 10 years | $54,399.60 | $28,798.80 |
This leaves out tax, fees and the money due at the start of each lease, which would make leasing cost more. It also leaves out repairs on the older car you own, which would make buying cost more. That is why choosing a model and year with a good record matters if you plan to keep the car. Our car pages show owner complaints by part for each year.
Rates, prices and values here are for example only. The lease payment is the one worked out above. The loan payment uses the standard loan formula, rounded to the cent.
When a lease can make sense
If you want a newer car every few years, drive less than the mileage limit and are fine with always having a payment, a lease can be a fair way to do that. It is rarely the cheapest way to have a car over the long run.
What to do next
- Ask for the cap cost, residual, money factor, term and mileage limit in writing.
- Negotiate the cap cost the same way you would the price.
- Multiply the money factor by 2,400 and compare it with loan rates you have been offered.
- Be honest about your miles. Count your last year of driving before you pick a limit.
- Price the same car as a loan in the payment calculator, and think about how long you would keep it.
Sources
Try your own numbers
Payment calculator
Your payment, the total, and how long you would be upside down.
Dealer offer X ray
The real APR, the lines you can say no to, and money the sheet hides.
Out the door price
Every fee and tax in one total, and up to three dealers side by side.
Education, not financial or mechanical advice. Have any used car checked by a mechanic you trust before you buy.